What Is Price Discrimination ?
Price discrimination is a marketing strategy in which sellers charge different prices for the same or identical products to different consumers. Price will be charged on the basis of willingness to pay, demography, age, gender of customers etc. The main objective of adopting this strategy is to maximize sales revenue and expand market share.
In this post, we are going to highlight the pros and cons of price discrimination technique.
Advantages Of Price Discrimination
The main advantages of price discrimination can be pointed out as follows:
1. Increased Sales And Revenue
Price discrimination helps to increase the sales volume because price is charged on the basis of buying capacity of customers. So, it attracts both high-end and price sensitive customers. Increased in sales leads to increase in the revenue of the company.
2. Benefits Of Economies Of Scale
Because of increased sales it enables the firm to increase the volume of production. It helps to lower the cost of production. A firm can enjoy bulk discount while purchasing raw materials. So, firms can be benefited from economies of scale.
3. Proper Use Of Space
Another advantage of price discrimination is that it helps to clear existing stock and create space of new items. Companies reduce the price of the products to clear the inventory.
4. Easy Market Entry
Generally, producers set less price for their products or services to enter the new market. It helps to attract more customers and provides competitive advantage. Therefore, price discrimination helps to expand market share.
5. Barrier To New Entrants
Firms may lower the price to discourage new entrants. So, it creates barrier for new commerce to enter the market.
Disadvantages Of Price Discrimination
The main disadvantages of price discrimination can be pointed out as follows:
1. Complicated And Time Consuming
It requires proper market research, consumer behavior analysis and market differentiation to apply price discrimination. Therefore, it is complicated and time consuming marketing strategy.
2. Possibility Of Consumer Exploitation
Firms may take advantage of inelastic market by increasing the price of products or services. So, firms may exploit consumers by adopting price discrimination in wrong manner.
3. May Create Monopoly
Big firms may misuse this method to capture the market by lowering the price of products. In increases the possibility of monopoly and black market.
Also Read
Meaning and objectives of price discrimination
Advantages and disadvantages of price skimming
Advantages and disadvantages of cost plus pricing
Advantages and disadvantages of competitive pricing
4. Decreased Loyalty
Customers paying higher price may feel discriminated and it may reduce customer loyalty. Hence, customers may switch to another products.
5. Decreased Consumer Surplus
Price discrimination may lead to decrease in consumer surplus because of higher price.
Pros And Cons Of Price Discrimination In Brief
Pros
* It creates economies of scale
* It maximizes sales and earnings
* It serves both price sensitive and high-end buyers
* It may create barrier for the competitors
* It provides competitive advantage
Cons
* It may create monopoly
* High possibility of market distortion
* It is complex and time taking pricing method
* It may decrease customer loyalty and brand image
